Health awareness in Indonesia tends to increase overtime. The World Bank's data (the World Development Index) shows that private health expenditure as a percentage of gross domestic product has increased from 1.24 percent in 2000 to 1.87 percent in 2013. The fact suggests a huge market for pharmacy company. The data also shows that pharmacy industry's turnover in 2014 was around Rp 52 trillion ($3.87 billion).
The size of the Indonesia pharmacy industry is also reflected in downstream level, for example the price of drugs. The Commission for Supervision of Business Competition claimed that price of medicine in Indonesia is one of the highest among Asean countries. An argument to explain this phenomenon is the allegation of bribery from pharmacy industry to doctors. Moreover, reports from one of Indonesia's investigative magazines shows that 40 percent of the price is used to bribe doctors.
Several measures have been suggested to address this issue from creating price ceiling for non-generic drug, to cooperating with law enforcement agency regarding bribery issue that involves medical personnel. Tax, in this particular case, can be used to alter behavior of both pharmacy industry and doctor by giving certain tax disincentive treatment.
This short paper will try to elucidate this tax role as well as showing argument behind the tax treatment.
Tax disincentive for pharmacy companies
Basically, tax disincentive for the company is treating the bribe as a non-deductible expense. This tax treatment can be analyzed in three aspects, for example the tax regulation, non-tax regulation and worldwide best practice.
Article 6 of Indonesian Income Tax Law states that, “in order to be deducted as expenses, the expenditures must be either directly or indirectly connected with the business or activities for earning, collecting and securing income as a taxable object.” The regulation says that the fee provided by the company to doctor is deductible only if the fee has direct or indirect connection with the drug selling activities conducted by the company.
Therefore, the main question is whether the company’s turnover is generated from the doctor’s prescription activity.
To answer this question, we need to examine relation between the company and the doctor. Legally, there is no written contract between the company and doctor that allows them to write particular drug in their prescription. The absence of this “contract” leads to a conclusion that there is no legal connection between the prescription and the fee. In other words, prescription and fee distribution activity are mutually independent and have no causal relation. Moreover, doctor’s decision in writing prescription must be purely based on their professional judgment according to article 2 of the Code of Medical Ethic Indonesia.
In the perspective of non-tax regulation, bribe or fee distribution to doctor is clearly prohibited, as it also explains the absence of the contract as mentioned in previous paragraph. Article 9 letter c of the National Agency for Drug and Food Control regulation No. HK.00.05.3.0276/2002 specifies that pharmacy industries are not allowed to give bonus or present in form of money and/or goods to medical doctor who prescribes its drugs product.
Moreover, article 13 paragraph 2 of the Law No. 8/1999 on consumer protection stipulates that business entity is prohibited to promote drug or food supplement by promising certain present. In the context of bribery, article 12B paragraph 1 of the Law No. 20/2001 on corruption eradication clearly state that gratification to public officer is considered a bribe if it has connection with their public position or against their responsibility.
All in all, bribery practice is not only legally unrelated to the company’s drug sale, but also violate existing law that could lead to criminal investigation. Therefore, in the perspective of tax law, the absence of this legal connection means that the fee can’t be deducted for tax calculation purpose.
The Organization for Economic Cooperation and Development (OECD) in its publication, dubbed the "Update on Tax Legislation on the Tax Treatment of Bribes to Foreign Public Officials in Countries Parties to the OECD Anti Bribery," outlines the tax treatment for bribery in several countries.
As stipulated in The USA Section 162 1 C) (2) Internal Revenue Code, no deduction shall be allowed for any payment if the payment constitutes an illegal bribe, illegal kickback or other illegal payment. Similar provisions are also found in Australia Taxation Laws Amendment Act (No.2) 2000; Austria Section 20 paragraph 1 subparagraph 5 of the Income Tax Act; Japan Corporation Tax Law: Paragraph 5 of Article 55; and Netherland Article 3.14, paragraph 1, sub h of the Law on Income Tax. Furthermore, in “Tax Administration: Detecting Corruption,” as OECD urges tax authorities to use tax policies to prevent corruption. Tax authorities are also encouraged to be involved not only in enforcing tax law but also in detecting other law violation including bribery and corruption.
Tax Disincentive for Recipient
In the opposite site, money received by the doctor should be regarded as an income as stipulated in article 4 par. 1 of the Income Tax Law. Our tax regime treats both legal and illegal income equally for tax purpose, therefore using “tax disincentive” term for the doctor’s side seems not appropriate since the bribe is also considered as an incremental economic benefit based on our tax law. Moreover, since the money is also considered an income by the tax law, it is also subject to withholding tax based on article 21 Income Tax Law.
Treating bribe as non-deductible in company side and taxable in recipient side seems violating non-deductible non-taxable principle. However, our government can used tax policy as a breakthrough to manipulate behavior of all pharmacy stakeholders in order to reduce drug price and maximizing social welfare. However, care should be taken for certain expenditure that the company spend for doctor’s education for instance. In this case, tax policy must be placed in the opposite side to encourage doctor’s capacity enhancement in Indonesia. Lastly, a right balance of tax policy is crucial because tax disincentive could possibly lower drug’s price in one hand but in the other hand tax policy should also maintain pharmacy company’s vital role in capacity development of the doctor.
I Wayan Agus Eka holds a Master's Degree in Public Finance from the National Graduate Institute for Policy Studies (GRIPS), Japan. The views expressed are his own.